City struggles with real world fallout of new sales tax law

This is a lengthy story about city sales tax law, but read it anyway; it has some interesting points to make later on....

Joshua Dixon, Staff Writer

This is a lengthy story about city sales tax law, but read it anyway. It has some interesting points to make later on.

Just like you or your business, the city government has to pay a sales tax when it buys supplies.When the Redwood Area Community Center buys a box of paper clips, for example, it pays a sales tax the same as you do.When city hall buys a new copy machine, it pays a sales tax.However, some people argued that was unfair to the taxpayers. The only way the city can raise the funds to pay the sales tax is to raise the annual property tax on its citizens. Therefore, the citizens are effectively paying tax twice for the same items.Therefore, if a city doesn’t have to pay sales tax on some items it buys, it can lower its budget by that amount and pass the savings on to the citizens in terms of a lower tax levy for the following year.Last May, the Minnesota state legislature passed a new rule exempting cities from having to pay sales tax on some items.In theory, it’s a good idea. Then reality hits the road....

“The (state) legislature passes things, and then city staff has to figure out how to implement it,” said Missi Meyer, finance director for Redwood Falls, last week. When the state passed the sales tax law, the cities affected by it have five or six months to figure out how to make it work in the real world.Connie Bohn, of the city’s finance department, summed up the new law in one sentence: “The city isn’t required to pay sales tax on some items.”The key word is “some”. Which items?According to state law, the city is required to pay sales tax on items it buys for city departments that compete with other business in the area.For example, the city streets department doesn’t compete with a private business for doing street maintenance, so it doesn’t have to pay sales tax on items it buys.But the city-owned liquor store, the Liquor Lodge, does compete with privately-owned liquor stores, so it does have to pay sales tax.Another qualification of the rule: if the city charges a fee for an item, or that department raises revenue for the city, it does have to pay sales tax.That means the city’s code enforcement doesn’t have to pay sales tax, but the Aquatic Center does.But what about all the inevitable gray areas?Say the city buys a large shipment of toilet paper in bulk. Does the city have to pay sales tax on that toilet paper, or doesn’t it?It literally depends on which city-owned bathroom any given roll is placed in.If a roll is placed in city hall, the city doesn’t have to pay sales tax on it. The same goes if it’s placed in most bathrooms in Ramsey Park.However, if that roll of toilet paper is placed in a bathroom in the Ramsey Park campground, then the city has to pay tax on it because the city charges people a fee to use the campground.What if a bulk order of office supplies gets divided between city hall — where those items are non-taxable — and the RACC, where they would be taxed?Yes, the new state sales tax rules require the city to keep track of where every roll of city-bought toilet paper, where every paper clip is placed so the appropriate taxes can be paid.Are purchases made for the RACC ice arena taxable or not taxable?“It depends on whether there is ice on it at the time,” said Meyer. “It’s exempt when there’s ice on it, and taxed when there is no ice on it. If we buy cleaning supplies in bulk and use some of them for the ice arena, we’ll have to keep track of which days they’re used when there’s ice, and which days they’re used when there isn’t ice.”Say the fire department wants to buy new fire hose. Taxable or non-taxable?It depends.“If the department buys fire hose to initially equip a new truck, it’s not taxable,” said Bohn. “If they buy replacement hoses a few years later on, we have to pay sales tax.”How about getting a maintenance agreement on a copy machine. Taxable or non-taxable?If the copy machine is at the community center, the maintenance agreement has to be taxed.However, if the exact same model copier gets a maintenance agreement from the exact same vendor for the police department, the city doesn’t have to pay tax on it.Say the city decides it wants to reconstruct a street in town. Are the building supplies to construct it taxable or not?According to state rules, the building supplies are not taxable if the city buys them directly. The supplies are taxable if they are bought by a construction company contracted by the city to do the work.“We don’t have the personnel to look after the building supplies or the space to store them,” said Meyer. “That’s what we hire the contractors for.”Say the city buys baseball gloves to use for the summer rec program. Sales tax or no sales tax?“If we charge a fee for using them, we have to pay sales tax on them,” said Meyers. “If we allow people to use them without paying a fee, there’s no tax.“Connie lets vendors know if an item is taxable (for the city) or not taxable. We might have to create separate taxed and non-taxed accounts with vendors (the city buys from).”If the street department orders office supplies from, say, Office Max, the supplies would go into the non-taxed account. That’s because the streets department doesn’t compete with any other area businesses.But if the city-owned Liquor Lodge also calls Office Max that same day to order the exact same supplies, they would be taxed because the Liquor Lodge competes with other liquor stores in the area.If the city does all this paperwork perfectly, making sure every roll of toilet paper and paper clip goes to the correct department and is perfectly accounted for, how much will it save city taxpayers this year?Approximately $64,000 out of a city annual budget of over $40 million.“We have a real concern about how much staff time has to be spent (managing the city’s sales tax),” said Meyer. “City staff will have to go over every receipt for every purchase the city makes.“When they wrote the law, it sounded simple, but when the city owns things like a liquor store or a community center....”Bohn said, “When the legislature passes a law they think it’s a good idea, but they really have no idea of what it means for us.“I took a workshop about this with the Department of Revenue, and they said they don’t know how to enforce it either.

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